By Peter Grant
Some deals are made in real estate hell. Others are from real
estate heaven. This is a story about one in the latter
category.
In late 2013, a venture led by investment firm Rubenstein
Partners purchased a vacant 450,000 square foot office park in the
Research Triangle region of North Carolina for $26 million. With
the region facing a high vacancy rate, Rubenstein planned to lease
it up in three years.
Instead it took about four months. In March of 2014, Chinese
computer maker Lenovo Group Ltd. leased the entire property for the
low-end server business that it had just purchased from
International Business Machines Corp. in a widely publicized $2.3
billion deal.
Now the Rubenstein venture has taken advantage of the lease and
the hot commercial sales market to sell the property to U.K.-based
90 North Real Estate Partners and Dubai-based Arzan Wealth for $127
million. Rubenstein has invested another $52 million mostly to
upgrade the property for Lenovo and add another 40,000 square foot
building.
In less than 18 months, the Rubenstein venture, which included
Grubb Properties, made roughly a $50 million profit.
"There is no question that I wish all of our deals turned out
this way," said David Rubenstein, the head of the Philadelphia
based firm. "There is also no question that not all of them
do."
The successful investment was a casebook study of how to make
money on suburban office property, one of the most challenged
commercial real estate property types as the U.S. economy has
recovered from the downturn. Part of it was luck. Lenovo, which
also purchased IBM's personal computer division in 2005, announced
in early 2014 its purchase of the IBM low-end server unit and
started looking for space in the area for about 1,500 IBM employees
that would be joining Lenovo.
But Rubenstein executives also recognized the value of the
property and spent years trying to get their hands on it. "I'm a
believer that you manufacturer your luck," Mr. Rubenstein said.
The buildings in the 67-acre office park had been developed by
Stockholm-based Ericsson for some of its U.S. operations. They were
vacated after a handset venture of Ericsson and Sony Corp. ended
and Ericsson decided to consolidate some of its U.S. operations in
Texas.
Rubenstein, which specializes in buying and leasing buildings
vacated by big corporations, began circling the property soon after
Ericsson's plans to vacate became known. The vacancy rate was 24%
in the Research Triangle area, near Raleigh, home to numerous
technology companies which got its name from the three large
universities in the area.
But Mr. Rubenstein said the rate looked worse than it was
because it didn't include about 11 million square feet in Research
Triangle buildings owned by the companies occupying them. Taking
those properties and obsolete buildings into account, the vacancy
rate was in the single digits, he said.
Moreover, if Rubenstein could buy at the right price, it would
be able to charge rents that were substantially less than what new
development would cost, he added. The Ericsson campus, which
included a 5-acre lake, "was better than brand new" because the
buildings large floor plates and high ceilings, he said.
At first Ericsson tried to lease the property itself and wasn't
interested in selling, according to Dan Doyon, the head of the
North Carolina region for Rubenstein. "I chased it for over two
years," he said.
But Ericsson finally agreed to sell. A few weeks after the deal
closed, Mr. Doyon recalls learning about the Lenovo acquisition of
the IBM unit while sitting in a coffee shop. He said he immediately
emailed his brokers on the property asking if Lenovo might be a
potential tenant.
"They replied back with a smiley face," Mr. Doyon said,
indicating that Lenovo had already indicated an interest in the
property. A few days later, Lenovo sent a formal proposal and five
weeks later they had a deal.
Last fall, the Rubenstein-Grubb venture hired Cushman &
Wakefield to put the property on the block. Demand was strong from
investors who wouldn't have been interested in the property when it
was vacant, but were interested now that Lenovo is committed to
being there for at least 13 years.
Dan Cooper, a partner with 90 North, says that the new owners is
confident that Lenovo will stay committed to the area even beyond
that. He pointed out that the Chinese company is making a big
investment into the property and that its employees are settled in
the region.
There are certain areas in which 90 North would be more wary of
buying a suburban office building because of the growing preference
of businesses to locate in cities, Mr. Cooper said. But there's a
"different demographic" in the Research Triangle area "so I think
it works," he said.
The 90 North group will get an initial yield on its investment
from the property's income of about 5.8%, according to people
familiar with the matter.
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